Thank You

Error.

We tend to regard capitalism in these cynical times as the worst economic system, except for all the others. By contrast, in Conscious Capitalism,
Whole Foods MarketWFM 0.8869179600886918%Whole Foods Market Inc.U.S.: NasdaqUSD36.4
0.320.8869179600886918%
/Date(1438376400263-0500)/
Volume (Delayed 15m)
:
13811646AFTER HOURSUSD36.45
0.050.13736263736263737%
Volume (Delayed 15m)
:
252905
P/E Ratio
22.00193423597679Market Cap
13051985471.4524
Dividend Yield
1.4285714285714286% Rev. per Employee
171456More quote details and news »WFMinYour ValueYour ChangeShort position
Co-CEO John Mackey and Bentley College marketing professor Raj Sisodia put forward what could be the most ambitious, indeed revolutionary, model for capitalism ever conceived. Had their application of higher consciousness been in the boardroom a generation ago, we might have avoided the suffocating regulations of Sarbanes-Oxley and Dodd-Frank, and the dire straits of companies like General Motors, Sears, Citibank, and even Enron.

Conscious capitalism, according to Mackey and Sisodia, is "a way of thinking about business that is more conscious of its higher purpose, its impacts on the world, and the relationships it has with its various constituencies and stakeholders."

Conscious Capitalism: Liberating the Heroic Spirit of Business

Although they call free enterprise the source of "unprecedented prosperity for humanity," they challenge the two celebrity philosophers of capitalism, Ayn Rand and Milton Friedman. They reject the Randian notion that "selfishness" and "greed" are virtues, and deny the Friedman view that the only responsibility of capitalism is to maximize profits for its shareholders.

"Business is not about making as much money as possible," the authors declare. "It's about creating value for stakeholders." Companies must develop sterling reputations to attract loyal customers, employees and suppliers, and generate community goodwill. If they do, superior returns can be achieved in earnings and stock price as a byproduct, not as a primary goal.

Can the authors back up their claims? They include numerous case studies, starting with a $16 billion grocery-store chain, Whole Foods (ticker: WFM), that Mackey co-founded and has been directing since the early 1980s. Whole Foods has some of the most innovative labor relations anywhere, including a cap on executive compensation, factoring in bonuses, at 19 times the average pay of all workers; total transparency in salaries and wages; and similar benefits to all full-time employees, including stock options.

How do employees feel? Mackey's company has a turnover rate of less than 10% a year, and has been listed on the Fortune 100 Best Companies to Work For since 1998. "Team members" earn above-average wages and benefits that include medical savings accounts and wellness centers. There are lots of built-in incentives to improve performance and earn more.

The company also enjoys superior returns. In the grocery business, traditionally known for its low margins, Whole Foods has achieved high margins, and does so with little advertising; customers are the stores' best advocates. Investors agree. Since the market hit bottom in March 2009, Whole Foods' shares are up eightfold, compared with a doubling of the Standard & Poor's 500.

Nor do Mackey and Sisodia explain how to deal with business reversals. Most companies go through tough times, when they must downsize, turn around, or go bankrupt, leaving workers unemployed and bills unpaid. Are the authors suggesting that if business leaders follow the tenets of conscious capitalism they will never fail—that they can always adjust to the new demands of fickle customers, obsolete technology, and government regulations—that firms will seldom if ever have to lay off workers en masse or close stores?

But Conscious Capitalism is still an inspiring blueprint for a better world. In The Wealth of Nations, Adam Smith wrote that the businessman is "led by an invisible hand…to promote the public interest." For conscious capitalists who have read that passage in Smith, the invisible hand has become visible. It's now up to them to make the most of that conscious fact. In that sense, Mackey and Sisodia have written a worthy successor to The Wealth of Nations. I can think of no higher praise.

MARK SKOUSEN is the editor of Forecasts & Strategies, a former professor at the Columbia Business School, and the producer of FreedomFest, which meets every July in Las Vegas.

This Is Progress?

Blaming Andrew Jackson

Reviewed by Ivan Eland

Salon magazine columnist and blogger Michael Lind has published eight previous books on U.S. history, foreign policy, and politics, in addition to four books of fiction and poetry. In his latest, ambitious, highly readable effort, Lind puts forward an ambitious but not persuasive thesis.

He pits the Jeffersonian tradition of limited economic intervention by the state against that of Alexander Hamilton, who believed in aggressive intervention, and strongly endorses the latter. Lind opines that during America's various cycles of industrialization, "nostalgic Jeffersonian politicians like Andrew Jackson, William Jennings Bryan, and Ronald Reagan" often arise to spout their demagoguery, but that eventually "the Hamiltonian tradition enjoys a revival, in light of the urgent need for large-scale, ambitious programs of national development based on collaboration rather than conflict between government and private enterprise."

Land of Promise: An Economic History of the United States

That collaboration has lately been condemned as crony capitalism, the unholy alliance between politicians and special business interests, which tends to stifle free markets. But Lind is having none of that. He traces the nation's "developmental capitalism," which he defines as the promotion of strategic industries, from Hamilton and Henry Clay through Abraham Lincoln, Franklin Delano Roosevelt, and beyond.

Lind correctly argues that even the Jeffersonians weren't always so Jeffersonian when in power, as Jefferson and Madison adopted some of Hamilton's support for business, public-works projects, and centralized banking. Lind blames Andrew Jackson for holding up Hamiltonian progress until the Civil War allowed Lincoln to informally amend the Constitution to bring back high protective tariffs, public- works projects, and central banking. When this system became outdated, FDR's New Deal came along to informally rewrite the Constitution to make government even bigger.

Ironically, Lind criticizes the Hamiltonian model, when countries such as Japan and China use it to compete—unfairly, he implies—with the U.S. Yet he praises the U.S. for using the same approach to promote American industry in the 1800s and embraces the model's resurgence now. That approach may be great for the selected industries that the government decides to help, but it distorts the economy and hurts both consumers, who have to pay higher prices or suffer diminished freedom to choose, and taxpayers, who have to fund business subsidies.

A bit of scrutiny casts further doubt on Lind's thesis. The government has not been more efficient in doing things that the private sector finds profitable or at picking winning industries or technologies. Although private roads existed in the 1800s, the mostly government-built roads today have decayed because of insufficient maintenance—which private industry does routinely—since maintenance offers politicians few photo-ops for ribbon-cutting.

Along with most historians, Lind gives FDR too much credit for creating the big government we have today. He does admit that the government takeover of the economy to fight World War I was a precedent for government activism during the Great Depression, but nevertheless focuses excessively on FDR's New Deal anyway.

He does correctly note that it was Jimmy Carter, not Ronald Reagan, who was the first Jeffersonian to begin dismantling New Deal regulation of the economy. Since the Carter, Reagan, and Clinton Jeffersonians had attenuated New Deal regulation, Lind predicts that the counterrevolution of Hamiltonian intervention ushered in by the great recession will persist for the foreseeable future. He may be right about that. Regrettably, he clearly welcomes it.

Lind's implied vision is that as society gets more complex, the government needs to get bigger. Yet economics has taught us that noneconomists like the author have that backward. As society gets more complex, it is harder for any government to regulate or control it rapidly, effectively, and efficiently. The dispersed information of workers and entrepreneurs, exercised through a price system of profit and loss, becomes all the more essential.

The Independent Institute Senior Fellow IVAN ELAND is the author of Recarving Mount Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty.

Some Call It Junk

Squeezing out yield

Reviewed by Stephen G. Moyer

The impulse to invest in high-yield bonds, also dubbed "junk," is easy to appreciate, and may also be prudent. It's surely attractive to think of 10-year bonds yielding 10%, providing a 10-year return of 260% with compounding—an example used several times by high-yield fund veteran Robert Levine in this engagingly written introduction.

But of course, those healthy returns apply only to a tax-sheltered portfolio. In any case, yields on junk are now running closer to 5.5%, and as this week's cover story points out, the sizable returns of recent years will be hard to come by, at least in the near term.

How to Make Money With Junk Bonds

That makes finding yields that also offer comparative safety harder than ever, and the idea that Levine's concise treatment can equip individual investors with the ability to navigate the high-yield market on their own turns out to be dubious.

Take the bane of junk-bond investing: high default risk. Levine argues that default-related losses can be adequately managed by using his "strong horse" investment methodology—essentially, value investing with an overlay of basic credit analysis. But his exposition of its principles is too brief and cursory to prepare the average investor to play with the pros.

Diversification and transaction costs also make direct high-yield investing a challenge. The author believes that at least 20 companies are needed for a suitably diversified portfolio. Assuming that high yield should be only 10% to 15% of the typical portfolio, this means investors need a total portfolio of about $1.5 million.

While that's within the reach of many Barron's readers, accumulating positions in such small lots adds significant transaction costs, which can quickly turn the risk-adjusted return equation negative.

Levine appropriately warns that one mistake can wipe out the returns of five good investments. But if a success rate of five for six is needed, retail investors should seriously question whether this is a game they should be playing on their own.

Fortunately, this book also includes a final and very useful chapter on fund-manager selection and how to translate prospectus babble into strategic insight. Readers should treat the first 20 of the book's 21 chapters as providing insight on why high yield should be a component of a well-diversified portfolio, and then use the last chapter to help them choose a fund or ETF.

But at this point, investors might want to treat this as more of a learning experience by keeping the sums committed to high-yield funds and ETF's relatively small. There will surely come a time when yields will rise back to levels normally offered by the junk-bond market.

As a high-yield fund manager, Levine deserves credit for taking the selfless position of suggesting that investors don't need to pay a fund manager. But in this case, selflessness has its limits.

A 1,000-Year Tour

Economics and freedom

Reviewed by Walter E. Block

Two cheers for the New York Times bestsellerdom enjoyed by this volume, even though its flaws are many and serious. Daron Acemoglu and James Robinson, economics professors, respectively, at MIT and Harvard, have written a sweeping narrative that offers a tour of more than 1,000 years of history. To read them on the evils of serfdom, guilds, monopoly, Luddites, entry restrictions, government marketing boards, autarky, corn laws, and apartheid; the tragedy of the commons and the benefits of free trade; and the Industrial Revolution and creative destruction, is to feel like giving them three cheers, plus a standing ovation.

The authors also put forward an important thesis. They argue that private property and economic freedom, or what they call "inclusive economic institutions," are central to fostering prosperity for the broad masses of people. As they explain, "To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract."

Why Nations Fail: The Origins of Power, Prosperity and Poverty

In a world that still only partially accepts the crucial advantages of economic freedom, that argument cannot be made too often, even though it's obviously true. One need only cite East and West Germany, and North and South Korea, to be presented with stark contrasts that come as near to controlled experiments as history can offer. To their credit, Acemoglu and Robinson offer many more such examples.

They put forward another thesis, however, which is obviously false. They argue that political freedom, or democracy, is a precursor of economic freedom. The clearest counterexamples are furnished by Hong Kong, Singapore, China, and South Korea. Hong Kong is barely mentioned in the book, and Singapore only slightly. In neither case do the authors recognize that both score at the top in the Fraser Institute's Index of Economic Freedom—the most objective source available—yet both have authoritarian governments.

The authors discuss China at length, but they fail to acknowledge that, according to the Fraser index, the People's Republic has made great progress in economic freedom over the past 30 years, along with a leap in growth rates. At the same time, China remains one of the least "politically free" in the entire world.

Professors Acemoglu and Robinson might have delved into the theoretical and empirical work on democracy in The Myth of the Rational Voter, by Brian Caplan, or in Democracy: The God That Failed, by Hans Hermann-Hoppe. Had they done so, they might realize, with Mark Twain, that "no man's…property is safe while the legislature is in session," or with H.L. Mencken, that "every election is a sort of advanced auction in stolen goods."

They misconstrue the success of FDR in "combating the Great Depression" through such measures as the National Labor Relations Act, "which further strengthened the rights of workers to organize unions, engage in collective bargaining, and conduct strikes against their employers." Such intervention in labor markets weakened economic freedom, and only exacerbated the high unemployment of the 1930s.

Finally, I thought I was second to none in refusing to attribute good motives to communists, interventionists, and totalitarians. But Acemoglu and Robinson go me one better in claiming that all the dictators responsible for creating poverty through "extractive" processes in their nations do so "not by mistake or ignorance, but on purpose." Has not a single one of these dictators been the well-meaning dupe of the many left-leaning economists still found at our prestigious universities?

WALTER E. BLOCK, professor of economics at Loyola University in New Orleans, is the author of Defending the Undefendable.